What is the difference between gross margin and net profit?

• A. Gross margin = net sales minus cost of goods sold; net profit is remaining income after all expenses, taxes, and interest.
• B. Gross margin equals net profit; net profit is revenue minus all costs.
• C. Gross margin includes taxes; net profit excludes interest.
• D. Gross margin is sales revenue; net profit is revenue minus all costs.

Answer: (A)

Gross margin (often called gross profit) measures profitability after the direct cost of producing or purchasing goods is accounted for. It is calculated as net sales minus cost of goods sold. This shows how efficiently a company turns inventory into sales before considering other expenses.

Net profit (net income) is the bottom-line profitability after every expense is subtracted from revenue. It takes net sales and subtracts all costs—operating expenses, interest, taxes, depreciation, and amortization. It reflects the overall profitability of the business.

So gross margin tells you how much you have left from sales to cover all other expenses, while net profit tells you how much remains after all expenses are paid.